By Josiah Wilmoth
The initial coin offering (ICO) is rapidly supplanting early seed venture capital as the fundraising vehicle of choice for technology startups. As a new investment vehicle, however, the ICO presents institutional investors with challenges along with its many opportunities.
Here are three challenges institutional investors face when investing in initial coin offerings:
1. Lack of Regulatory Clarity
Although the Securities and Exchange Commission (SEC) actively monitors the ICO markets for fraudulent projects, it has not issued detailed guidance for industry participants. The SEC has stated that some ICOs fall under security regulations, but it has not released a rubric to help startups and investors discern whether a token should be classified as a security or utility token. Consequently, investors must conduct due diligence by consulting with securities lawyers as well as ICO advisory services such as Strategic Coin. Thankfully, the release of compliant token release platforms such as the one recently announced by Overstock will make the regulatory environment less precarious for all parties involved.
2. Difficulty Valuing Startups & Assets
Crypto tokens bear resemblances to traditional investments, but in some ways, they represent an entirely new asset class. Thus, investors must necessarily exercise some creativity when evaluating digital assets such as crypto tokens.
Moreover, as venture capitalist Stan Miroshnik told TechCrunch in a recent interview, it is difficult to appraise startups that have raised money through ICOs as well as conventional channels. Since tokens may or may not represent equity within a company, it is even more difficult to extrapolate a company’s valuation based on funds raised solely through an ICO.
3. Storing Crypto Tokens
Finally, institutional investors face particular challenges when it comes to maintaining regulatory compliance when storing crypto tokens purchased through initial coin offerings. Investors must find custodial services with compliant, segregated accounts that will hold tokens in a secure location. Investors are currently limited to a few options for custodial accounts, but it is likely that increased attention from large firms will encourage more custodians to enter the cryptocurrency sector.
Strategic Coin is your go-to source for cryptocurrency investment research and education. Whether you need help understanding the basics of blockchain technology or desire to read an in-depth analysis of the latest initial coin offering, Strategic Coin will provide you with the information you need to take advantage of market opportunities within the crypto finance industry.
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